Markets are finally waking up to global wall of worry
FRIDAY’S BOUNCE WASN’T ENOUGH TO PREVENT DOW’S FIFTH WEEKLY DROP
To the big-time buysiders, those investors more likely to check their portfolio by the season than the session, it was just another week. The S&P 500 still shows a big green number for 2019, after all.
Ditto the quants, with their multi-year horizons and programmed strategies. And hedge funds, whose nerves have been on show for a while now.
But for a host of investors, traders and analysts, this was the week markets finally woke up to a world of hurt.
President Donald Trump lit the touchpaper days before, signing an order effectively curbing Huawei Technologies Co.’s access to the American market. The reaction was slow burn, but by Monday US stocks were extending declines as major chipmakers prepared to cease business with the Chinese giant.
Tuesday’s respite — thanks to a partial walk-back of the ban — was brief. By Wednesday, more companies were in Trump’s sights, and more losses ensued. Thursday was a sea of red as the Asian nation hardened its own rhetoric. Friday’s bounce wasn’t enough to prevent a fifth straight weekly drop for the Dow Jones Industrial Average, the longest slump since 2011.
The move against Huawei — a metaphorical hand grenade in the heart of global tech — has forced market participants to ditch the rose-tinted glasses. Now that they have, not only does the prospect of a prolonged trade war confront them, but a heap of other stuff too.
Issues
Simmering tensions in the Middle East. A looming change in the UK government. Impeachment clamour in Washington. Some familiar flash points in emerging markets. That’s an awful lot of risk at a time when many assets still look relatively expensive. ■ The stock market may be bound in a range by US President Donald Trump, according to JPMorgan Chase & Co.’s Marko Kolanovic.
There’s a “Trump collar” on markets as the president reassures traders when equities are down, but does things that worry investors when they’re doing well, said JPMorgan’s global head of macro quantitative and derivatives research. Kolanovic’s positive on aspects such as the Federal Reserve’s effects, the US and Chinese economies and investor positioning. His firm has a year-end forecast of 3,000 for the S&P 500, or about 6 per cent above current levels.
Kolanovic last week said that a “Trump put,” with the president trying to soothe investors, would be at a 3 per cent-4 per cent sell-off.
“The market needed an excuse to correct and the tradewar headlines were the trigger, but the underlying weakness is much more complex than that,” said Alberto Tocchio, the chief of Heron Asset Management, a Switzerland-based family office with 2.5 billion Swiss francs ($2.5 billion) under management. “A continuous deterioration of the macro environment, high valuations and political/geopolitical uncertainty are also importantly weighing on markets.” Viewed from afar, the US stock picture doesn’t look bad. The S&P 500 is about 4 per cent from a record peak, still up 13 per cent in 2019, and price swings — as measured by the Cboe Volatility Index — are higher than a month ago but still at about the one-year average.
But look closer, and the flaws and imperfections become clearer — and the biggest blemish is arguably the tech sector.
The Philadelphia Stock Exchange Semiconductor Index dropped 6 per cent last week, on track for the worst month since the financial crisis. The Nasdaq 100 index is off almost 7 per cent from its all-time peak at the start of the month. A gauge of the FANGs, — Facebook Inc., Amazon.com Inc., Netflix Inc. and Alphabet Inc. — has fallen faster still.
That’s all vital because the phenomenal performance of tech shares has underpinned the decade-long bull market. From trough to peak the Nasdaq 100 gained about twice as much as the S&P 500.
“Tech, communications and consumer discretionary look to me to be the three areas to avoid now,” said David Holohan, head of equity strategy at Mediolanum Asset Management in Dublin. “The outlook has certainly deteriorated because of supply chain worries particularly on the semiconductor side, and they’re only going to get worse.”